The water industry regulator is investigating whether Thames Water has breached the conditions of its licence by paying a dividend, as executives face the prospect of being recalled before MPs over financial concerns.
Announcing half-year results on Tuesday, Thames Water said it had paid a £37.5m dividend from its operating company – which is regulated – that ultimately reached a holding company. Thames said the money was used to service “external debt obligations” of the holding company and one of its subsidiaries.
Thames, which has £14.7bn of debts, informed Ofwat of its intention to pay the dividend in October, and the regulator wrote to the company requesting further information about the payment by the end of this month, the Guardian understands.
Thames’s largest investor is Ontario Municipal Employees Retirement System (Omers), a Canadian pension fund, and its investors also include the Universities Superannuation Scheme, China Investment Corporation and Abu Dhabi’s Infinity Investments.
Ofwat introduced a new licence condition in May that requires companies to only declare or pay dividends after taking account of service delivery for customers and the environment over time, as well as considering current and future investment needs and financial resilience over the long term.
Its investigation will look at whether this condition has been breached by Thames.
The regulator has been under pressure to show it is cracking down on a water industry that has been repeatedly criticised over sewage dumping, executive bonuses, leaking pipes and underinvestment in UK infrastructure.
An Ofwat spokesperson said: “Following notification that Thames Water has paid a dividend to shareholders, Ofwat is investigating whether this payment meets its licence requirements.
“Ofwat has requested Thames Water provide more information to demonstrate how, specifically, the dividend payment meets the licence requirement to take account of service delivery for customers and the environment, as well as investment needs and financial resilience.
“We will review any additional information the company provides and decide whether there is a case for further action.”
Ofwat can impose penalties of up to 10% of turnover on regulated companies. The guidelines for these penalties stipulate that “any penalty should be proportionate to the circumstances of any case”.
A Thames Water spokesperson said: “We informed Ofwat about our decision [to pay the dividend] and are currently working with Ofwat to provide further context and clarification around our board’s decision and its reasons. We take our licence obligations very seriously, including those relating to the declaration and payment of dividends.”
The company added that external shareholders had not taken a dividend for six years, and that it does not plan to pay any external dividends “until at least 2030, to support our turnaround”.
Thames said that its revenues rose 11% to £1.2bn over the six months to 30 September. The company, which supplies 16 million customers, is planning to raise customer bills from £436 to £611 a year in the five years from 2025 to pay for £18.7bn worth of investment.
The debt-laden water supplier said it was working on a three-year turnaround to overhaul its environmental, operational and financial performance, as profits more than halved to £246m in the six months to 30 September, largely due to changing valuations of its assets.
Auditors have raised concerns about the Thames parent company’s financial stability in accounts for 2022-23 signed off in July and published at Companies House last week.
MPs confirmed on Tuesday that Thames Water chief executive Cathryn Ross will next week be recalled to the environment food and rural affairs committee to face questions about the company’s financial stability.
Thames executives gave evidence to MPs in the summer, when the company promised it would be stabilised by an equity injection of £500m from shareholders. A report in the Financial Times last week raised concerns that the money was not equity, but debt taken on by the parent company.
The company has written to Goodwill to dispute the findings but said it would be happy to appear.
The Liberal Democrat leader, Ed Davey, said the state of the company was a national scandal. “Enough is enough,” he said. “Thames Water has become a slow-moving car crash. The board must resign with immediate effect and must be held accountable for financial and regulatory cover-ups as well as the destruction of local environments.
“Conservative ministers are letting water bills rise by disgusting amounts in order to pay off Thames Water’s dirty debts.”
